Here are the next four of my 2011 picks. I am behind schedule, after publishing the first 5 earlier in the week (see: Chasing Value: 2011 Stock Picks -- 5 of 11). This year instead of starting completely anew, I am adjusting my 2010 picks. There is no sense in abandoning good ideas just because the calendar turned a page.
You will actually find support of running themes I have been writing about over the past few months. One of these is the idea of making a contrarian investment in a basket of stocks that have been both scalded and scolded in the headlines. Six stocks were included in such a group that I called the "toxic stocks" (see: Chasing Value: Toxic Stock Update #3 -- BAC, BP, C, GE, GS, RIG).
Among these six I have already included General Electric Company (GE). Two more will be added today in picks 6 though 9. The starting point is the December 31, 2010 closing price.
6) Bank of America Corporation (BAC): $13.34, 0.30% yield
Unloved for most of 2010 and down for the year, when I last reported on the toxic stocks it was the only one that was down. Headlines are not attempts to shed light on the truth but to sell newspapers and increase web interest. Bank of America has been attacked from all sides: the public, numerous attorney generals, the federal government, Wall Street bond traders and even its own shareholders. There were rumors and innuendos that Wiki-leaks was going to sully BAC's reputation further by releasing insider dirt. All of this lead people to fantasize about billions of dollars of exposure, the greater the more titillating, all going too far.
At its high in 2006 BAC traded above $54 per share. For most of the past 12 years it traded above $30 per share. All this before acquiring Countrywide Financial and Merrill Lynch brokerage, and numerous other small companies. The economy and the acquisitions have beaten down the stock and investor morale but eventually we will see something resembling its former self with much greater income and cross selling of services. If its normalized earnings return to half what they were ten years ago and you add at least a marginal benefit from the acquisitions then Bank of America should be worth something north of $30 per share.
If it took 4 to 5 years to get there you would have a nice return on investment. If it took 2 to 3 years you would have a grand slam. I believe that the latter case is actually the greater possibility. It already traded above $18 per share last April when the market over heated. Projected earnings are expected to push the P/E down from 65 to 11 during the course of the year. I have no idea how realistic these projections are but I do think BAC trades above $20 before this year is up just based on the financial dust continuing to settle.
7) Citigroup, Inc. (C): $4.73, no dividend
Many of the things that have been said about BAC could also be said of Citigroup except they were not an acquirer as much as a survivor. It only made it thanks to the good graces of the government which just recently completed selling the last of its stake in the company for billions in profits. Although many, if not most people were screaming about this process, few would not be happy with the end result -- profits, jobs, and a much stronger balance sheet ready to compete again on an international playing field.
Citigroup as a franchise has a much stronger brand overseas than it has at home and this is likely to be successfully leveraged in the coming year. Among my earliest stories, long before the crises, I wrote that we should break up Citigroup as soon as possible, and Citigroup should hire forensic auditors. The financial crises forced Citigroup to do some of what I suggested, unfortunately not by choice but by necessity. Now it is leaner and meaner with a much improved respect for risk management.
Anyone that has been reading my rants for a while would know that I have not been a big fan, as this story makes very plain: Citigroup -- burning down the house -- drops below $1. Times have changed. The company has changed and it will continue to improve as time passes and the clean up process continues. The stock has made a great comeback. I am not sure 2011 will be a repeat of 2010 performance levels, but it do think it beats the S&P 500 again. I can point out some of the metrics but only for dramatic effect because they will not stay where they are long.
They are in fact silly. In the past year because Citi has just come off life support the numbers indicate the company grew earnings 2,035%, the P/B is only 0.70, the P/S is only 0.36 and the PEG is only 0.51. To me this indicates fertile ground for stock appreciation.
8) Telefonica SA (TEF): $68.42, 6.3% yield
Last year Brasil Telecom (BTM) sabotaged my results very early in the year and although I ended the year ahead of the S&P 500, it should have been much better. There is nothing you can do if some back office dealing smacks you down, except be glad you did not bet the house. I picked the stock for its yield and because Brazil's economy was a market leader and on top of both of these issues Brazil was awarded the Olympics.
None of this mattered. In some ways my replacement stock Telefonica is the antitheses of BTM. Instead of the Spanish economy doing great there is real concern the country will follow, Greece, Ireland and Portugal into the economic abyss. The stock was hit hard when this issue surfaced in the headlines knocking TEF down about 27% from around $74 to $54 in sympathy with the market. However, only about 40% of Telefonica's growing business is in Spain. The rest is spread globally throughout the European Union, Eastern Europe, Central and South America.
Much of the argument in favor of this stock I made earlier as I have suggested this stock to readers and invested myself as recently as December 3, 2010 (see: Chasing Value: Time to Redial Telefonica).
9): Noble Corp. (NE): $35.77, 2.1% yield.
This year I am sticking with financial and oil stocks. Noble represents great potential not only due to the growing pressure on oil prices, but it fits in nicely to my toxic stock thesis as an alternative to Transocean (RIG). Noble Corp having suffered equal tarnishing has been less in the public eye.
I gave great thought to including Archer Daniels Midland (ADM) again this year, as I believe that food prices will rise with oil prices. I chose oil over food, or fertilizer or the like because they will lag a little behind in that rising energy prices are one of the causes of rising food prices. I also thought about taking on the housing industry as we may have reached bottom or close to it, but we could spend the entire year clearing out bank inventory before home builders see much promise. That actually is one more reason to favor the lenders first.
Getting back to Noble, I tend to be relatively consistent about my investments and this company came up on my radar screen more than once during the year, most notably when I posted this article: Chasing Value: Barron's Is Right About Noble, Raytheon, but Forget About Its Market Strategists and again in this article: Chasing Value: Noble Corp.'s Meaningless Downgrade. Not surprisingly the stock is up since the downgrade, which still left its 12 month guesstimate above current levels.
Noble, Like Transocean is based in Switzerland, and has long term contracts for offshore drilling rigs for the oil and gas industry, with a fleet of 71 offshore drilling units (including six drilling rigs currently under construction. Although this has not been a banner year I think the stage is set for growth. The company has a P/E of 8.43, 45% net profit margins and sports double digit returns on equity, assets and invested capital.
I have two more picks to report in the next post.
Sheldon Liber is registered architect and the CEO of Chasing Value ™ Asset Management, Inc., a small private investment company. He writes the columns Chasing Value™ and Serious Money.and is on twitter: ChasingValue Disclosure: He own shares and/or options of BAC.C, NE, RIG and TEF,